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Too Special A Friendship: Is Germany Questioning Russia's Embrace?

Pipes designed for the construction of the Nord Stream conduit, which should deliver supplies of gas from Siberia by bypassing Soviet-era pipelines traversing troublesome transit countries such as Ukraine.

Temperatures were approaching freezing in November 2010 when a stern Vladimir Putin delivered a trademark tirade at a business forum in Berlin's venerably posh Hotel Adlon, steps from the Brandenburg Gate.

Captains of industry sat stony faced as the Russian prime minister, reminding them Germany was phasing out nuclear power, said they had nowhere to turn but Russia, which was already supplying 40 percent of the country's demand for natural gas from its vast deposits. Otherwise, "how will you heat your houses?" he mocked. "Even for firewood, you'd have to go to Siberia."

The immediate object of Putin's ire was a European Union plan -- "no better than terrorism," he called it -- to liberalize its energy markets, which he said would create barriers to investment by Gazprom, Russia's giant state-controlled monopoly.

Gazprom had spent years buying up European energy infrastructure. That effort was now under threat, prompting thunder from Putin. "What's this robbery?"

It was the kind of performance his hosts had been intent on avoiding. Since the collapse of communism in Russia, successive German governments have exerted painstaking efforts to smooth relations with Moscow. Now Putin appeared to confirm his critics' fears.

Some read his diatribe as an indication of frustration. The Kremlin had been confidently cementing European dependence on Russia, partly by collecting stakes in European energy companies. Then the global financial crisis diminished energy consumption, compounding other developments in the industry that were threatening to undermine Moscow's strategy. Casting himself as a great liberalizer, Putin proposed the creation of a free-trade zone "from Lisbon to Vladivostok."

Germans responded with polite skepticism. Chancellor Angela Merkel issued vague praise before dismissing the offer as belonging to a "future vision." For the first time in years, however, the future of Germany's energy relations with Russia is no longer clear.

Putin and other officials have been busy seeking exemptions from EU regulations in Brussels, chiefly by threatening higher gas prices. Meanwhile, Moscow is pushing ahead with colossal projects to build two pipelines to Europe that the Kremlin hopes will lock in European dependence.

One of the routes will end in Germany, Gazprom's largest customer and Russia's biggest trading partner in general. Moscow sees its relationship with Berlin as its greatest asset for playing a greater role in European affairs. At the same time, Germany, positioning itself as Russia's most important EU partner, is trying to finesse what Germans call a "modernization partnership" with Moscow.

The tight relationship worries those who believe that Russia is using its natural resources for political advantage as well as commercial profit.

Critics say that by making lucrative deals with companies in Germany and elsewhere, Gazprom essentially turns them into Kremlin lobbyists in their own countries, whose susceptibility to Russian influence grows.

Some believe Moscow's promise of a steady flow of cheap energy has encouraged German politicians to surrender a degree of sovereignty by reducing their enthusiasm for EU unity and collective action, especially on the energy front.

Such tendencies reverberate far outside the country's borders since Germany, the European Union's longtime industrial engine, is now emerging as its sole political superpower. Falling gas prices may now encourage Germany to reassess its role, but it may be too late to slow Moscow's race to further consolidate its control over Europe's energy industry.

Co-Dependence

Days after Putin's November visit, record snowfall during a freak deep freeze all but shut down Berlin as if to reinforce his warning.

Although the efficient order projected by legislators' modernist offices near the Bundestag seems a world away from Moscow's corruption and bluster, the fact is that Germany's extraordinary export-driven economic boom depends on Russian energy.

The implications of that dependence were first driven home for most Germans when Gazprom briefly cut off gas to Ukraine during a price dispute in 2006, disrupting European supplies. As Putin indicated in November, the dependency will surely grow as Germany moves up its timetable to shut down its nuclear power plants in the wake of Japan's Fukushima Daiichi disaster, and demand for energy continues to rise.

Hans-Ulrich Klose, a dapper, gray-haired veteran member of the Social Democratic Party (SPD), admitted the obvious by saying it's impossible for Germany to solve its energy problems without Russia.

Antagonizing the Kremlin with criticism and isolation isn't the answer, he said in his handsome office adjacent to the parliament, laying out the official rationale. Instead, engagement offers the prospect of influencing long-term change. "So it makes a lot of sense to try to put them on a reliable basis, which is what we're actually trying," he said.

Former German Chancellor Gerhard Schroeder declined to be interviewed for this article.

Germany may depend on Russia for energy, Klose added, but Russia desperately requires German investment and technology to tackle the critical task of modernizing its seriously inefficient economy.

Despite evidence that growing Russian authoritarianism is increasingly marginalizing independent NGOs, he said Russians also want German help in building civil society and democratic institutions. That, he said, makes the relationship workable because it's one of co-dependence.

SPD politicians led by their onetime leader, former Chancellor Gerhard Schroeder, are among the strongest advocates for better relations with Moscow.

Acknowledging that Russia doesn't meet normal Western European standards, Klose said making it a "normal European" country will require two or three generations. In the meantime, he maintained, creating dependency limits the possibilities for Russia to "to sneak out and do something crazy."

'Historic' Deal

Such arguments for engaging Russia gained their greatest currency around December 2005, when officials from both countries met in a small village in northwestern Russia on a snowy day for an event Schroeder may have wished had never taken place.

The German energy minister joined Russia's prime minister to launch construction on a key Kremlin project: a new pipeline that would directly connect Russia and Germany under the Baltic Sea. The Northern European Gas Pipeline, later christened Nord Stream, would deliver supplies from the Yuzhno-Russkoye fields in Western Siberia, bypassing Soviet-era pipelines traversing troublesome transit countries such as Ukraine.

Gazprom CEO Aleksei Miller was on hand, but before giving the signal for welders to begin joining the ceremonial first two pipes -- symbolizing the start of what he called a "fundamentally new phase in cooperation between Russia and Germany" -- he dropped a bombshell: the chairman of the Gazprom-controlled consortium overseeing the construction would be none other than Schroeder himself.

He'd stepped down as chancellor only weeks earlier, and the reaction to the news in Western capitals was instant and damning. Schroeder's new job was for a project he'd not only championed in office, but also, as it later turned out, guaranteed with a billion euros of government money.

Schroeder, who declined to be interviewed for this article, said he would receive 250,000 euros ($350,000) a year. If nothing else, his critics charged, it stretched the boundaries of bad form. Others went further.

Polish Defense Minister Radek Sikorski -- whose country, along with Ukraine, Lithuania, and others, feared the end of transit fees and access to Russian gas -- compared the Nord Stream deal to the Molotov-Ribbentrop pact that partitioned Poland between Nazi Germany and the Soviet Union in 1939.

Former Czech President Vaclav Havel told RFE/RL the pipeline project was a "provocation." It could only be completed "by people who don't know anything about modern history, or what's going on today."

Alexander Rahr, a key figure in German-Russian economic relations

No doubt aware of the controversy his new job would generate, Schroeder had wanted the announcement to come the following summer. But Alexander Rahr of the German Council of Foreign Relations, told me Putin decided to "give Schroeder a present" instead; by leaking the news he believed would make Schroeder appear more influential.

A key figure in German-Russian economic relations with close ties to Moscow, Rahr called Schroeder a "strong believer" in the alliance he helped forge with Moscow. "He thinks he'll enter history for that."

Schroeder's involvement with Russia -- where the Kremlin's drive to employ retired Western politicians has been dubbed "Schroederization" -- had personal as well as political motives. The son of a housecleaner, he felt close to Putin, who spent his hardscrabble childhood in a Leningrad communal apartment and speaks fluent German.

The chancellor, who has adopted two Russian orphans, became one of Putin's biggest boosters, once famously calling him a "flawless democrat."

But it wasn't until the U.S.-led invasion of Iraq in 2003 united the two in opposition that they drew publicly close. Criticized even within his own SPD for pushing painful social reform at the time, Schroeder "needed other projects," Rahr said. "And by turning to Russia, he was following the Ostpolitik tradition of Helmut Schmidt and Willy Brandt," who called for "change through rapprochement" with communist East Germany in the 1970s.

New Ostpolitik

Schroeder's old SPD allies titter uncomfortably when asked about their former leader's move to Nord Stream.

Rolf Muetzenich, the party's foreign-policy chief, said he sees no conflict between the ex-chancellor's ongoing role as a politician and Gazprom lobbyist. "He's a social democrat when you look at his values," he concluded in his plush office on Unter den Linden, Berlin's Champs d'Elysees.

German Green Party deputy Marieluise Beck

However, others criticize Schroeder's decision -- and his continued membership in a party that still promotes "social justice," including combating the influence of big monopolies -- as more than a mere embarrassment.

"Disgusting," said Marieluise Beck, a Green Party member of parliament, over tea in her office in the same building. "With the Nord Stream deal, Schroeder gave Russians the first real possibility of dividing and conquering," said Beck, who is among the very few politicians to criticize, or even admit, Russian influence on foreign policy.

She is convinced Gazprom is different from Western firms because beyond the usual merging of politics and business, it actually helps execute Moscow's foreign policy by offering very lucrative contracts to European energy companies.

Their executives then act as lobbyists for the Kremlin, leaning on their governments to put their national interests above a unified European energy strategy. "Of course it weakened the EU," Beck said of Nord Stream, "giving Putin a wonderful opportunity to act according to his interests and not the interests of those countries."

Merkel's election in 2005 promised change. Born in East Germany and conversant in Russian, she took office urging the EU to adopt a unified energy policy and diversify energy supplies.

During her first visit to Moscow as head of state -- in January 2006, shortly after Russia's gas shutoff to Ukraine -- Merkel made a point of meeting human rights activists to signal a departure from Schroeder's refusal to so much as nod in their direction.

That "changed the atmosphere," said Beck, a prominent rights advocate. But, she added, Dmitry Medvedev, who has cultivated a misleadingly liberal image since becoming Russia's president in 2008, has since "softened" views toward Moscow. "He looks like the West and talks like the West, so relations are more friendly and relaxed. But when it comes to real change in Russia, you don't find much."

Nevertheless, Merkel soon dropped her combative stance. Her first government, which lasted until 2009, sold its renewed drive to engage Russia as an updated Ostpolitik.

Now "rapprochement through economic interlocking" would supposedly encourage Moscow to adopt Western values by helping integrate it into the Western economy, a notion the energy lobby tirelessly promoted.

By 2008, Germany again appeared to be Russia's biggest booster in Europe. When the Bush administration campaigned to put Ukraine and Georgia on a path to NATO membership, which provoked fury in Moscow, Merkel led the opposition to the plan.

NATO rejected the initiative, despite international outrage over Russia's summer invasion of Georgia. Beck said she believes Merkel "closed the window of opportunity" on Ukraine, where a new pro-Moscow government is now busy arresting former pro-Western officials.

Perhaps more tellingly, Merkel then headed the effort to block proposed EU regulations that would have restricted foreign companies from buying European energy utilities, measures aimed at slowing Gazprom's advance.

Beck said that in Russia itself, the culture of corruption, lawlessness, and arbitrary Kremlin rule has been bolstered by Germany's unwillingness to criticize it. "Our logic is we must be nice, good friends with the Kremlin because we want their oil and gas," she said. "But the Putin show would be over if he couldn't sell them to his Western partners."

A Clandestine Company

Gazprom conducts much of its German business through the sleek Berlin headquarters of its subsidiary Gazprom Germania.

It was established in the early 1990s by Moscow's old friend, Hans-Joachim Gornig, the former deputy chief of East Germany's oil and gas industry who oversaw the construction of the GDR's pipeline network.

The former head of Gazprom Germania,Vladimir Kotenev, kept a low profile.

Headed until last month by Vladimir Kotenev, a well-connected former Russian ambassador to Germany, the company employs some 200 people. They maintain a low profile, said Heiko Lohmann, who publishes a newsletter about Germany's gas industry, partly because no one in German officialdom keeps "a really close eye" on their activities.

What's clear is that Gazprom has signed deals that have proved very profitable for its German partners, chief among them its main Nord Stream collaborators: energy giant E.ON and chemical giant BASF.

E.ON has the flexibility to buy less gas, at Gazprom's expense, when temperatures rise. Claus Bergschneider, a former managing director of Gazprom Germania who told me that Western companies don't do the same, characterized the favorable terms as "political support" for German energy companies.

Besides making money for its corporate partners, Gazprom has taken advantage of previous liberalization in the EU gas market aimed at weakening the power of large monopolies by forcing them to "unbundle" distribution networks from production facilities.

Ironically, that has helped one of the world's largest monopolies snap up newly freed parts of the profitable "downstream" energy market, the utilities that deliver Russian energy supplies directly into the homes of its European customers.

Gazprom's German ventures include its Wingas joint venture with Wintershall, a subsidiary of BASF that's Germany's largest oil and gas producer and controls 18 percent of the gas market. Gazprom has given its top German partners unrivaled -- albeit largely symbolic -- stakes in some of its Russian assets. BASF and E.ON each control almost one-quarter of the Yuzhno-Russkoye gas fields that will provide most of the supplies for Nord Stream.

This month it emerged that Gazprom is also looking into buying a stake in the country's second-largest electricity producer, RWE, which has been hit by overpriced gas contracts, weak power prices, and is under threat from a new tax on nuclear fuel.

In addition to its numerous German ventures, Gazprom Germania holds stakes in a number of companies outside the country, including almost 40 percent in a shady Austria-based gas-trading company called Centrex, whose parent company "Stern" magazine traced to an "inconspicuous three-story building" in Cyprus. "Such convoluted constructions make it almost impossible to keep track of the flow of money," the magazine declared.

SPD foreign-policy spokesman Muetzenich dismissed such criticism, saying there's "no big difference" between the behavior of Russia and other countries. "Is there a difference when you look at Libya or Qatar or other key players in energy policy?" he asked. "Governments and companies are also very close there."

As for concerns about Gazprom buying up Western energy utilities, Muetzenich said, "it's a free market." But it's no secret Gazprom uses shadowy front companies to obscure its role in deals across the continent and, many suspect, in channeling huge sums to partners and friendly politicians.

Among oligarchs and other powerful enablers, the company has been tied to Semyon Mogilevich, reputedly Russia's biggest mobster. Frankfurt-based investigative journalist Juergen Roth said he sees that arrangement reflecting the corruption in the company's ethos. "You can be sure nothing takes place without kickbacks or bribery," he told me.
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Suspected organized crime boss Semyon Mogilevich

Roth has uncovered border-guard documents describing an investigation of a Gazprom manager found carrying letters that outline schemes for transferring billions of dollars around the world. He said the German authorities declined to probe further because they decided the case didn't involve Germany. "But that money belongs to Gazprom shareholders," Roth said, "and it's flowing here from Russia."

Kremlin Lobbyists

Gazprom lobbying is especially effective in Germany because the energy industry's influence is unrivalled. Four companies -- BASF, E.ON, and electricity utilities RWE and Energie Baden-Wurttemburg -- are dominant. Ties between business and politics are especially strong in the SPD heartland of North Rhine-Westphalia, a major industrial base that's home to RWE and E.ON subsidiary E.ON Ruhrgas.

The big four play a large role in formulating German energy policy through a "very complicated network" that lobbies ministries and manipulates public opinion, the Green Party's energy-policy chief, Hans-Josef Fell, said.

Fell, who sports black jeans and a beard, wrote a renewable-energy act enacted when the Greens -- who want all Germany's energy to come from renewable sources by 2030 -- were in government.

Fell told me he believes only renewables can provide real energy security. He said that when power companies blamed spending on renewable energy for a recent rise in consumer electricity prices, "nearly everyone believed it."

When it comes to Berlin's Russia policy, the energy lobby influences public and political opinion through the Committee on Eastern European Economic Relations, which represents German companies doing business in Russia and other former Soviet bloc countries. Director Rainer Lindner, who denies the organization is a lobby group, likened its activities to "economic diplomacy."

"People like Schroeder are actively trying to improve energy security in Europe," he said, dismissing criticism that co-dependence is chiefly a means of sugarcoating the harsh reality that Germany has nowhere but Russia to turn for its energy. Repeating the argument that Germany can influence Russian behavior, he pointed to a high-profile annual conference on civil society called the St. Petersburg Dialogue, set up a decade ago by Schroeder and Putin.

But journalist Gemma Poerzgen, who wrote a book about Germany's energy ties to Russia and attended last year's meeting, called the conference "ridiculous."

She told me that last year's meeting in Yekaterinburg, which she attended representing Reporters Without Borders, included not a single small or medium-sized company. "It's dominated by Gazprom." Gazprom Chairman Viktor Zubkov, a stern Putin crony and former prime minster whose son-in-law is the current defense minister, heads the conference's Russian committee.

"There's a lot of interest in driving the dialogue in the direction of nice talk with no real debate or criticism," Poerzgen said. The Committee on Eastern European Economic Relations, she added, "makes a huge effort to create the impression that Russia business is Germany's most important issue."

Nevertheless, the publicity -- together with lavish Gazprom spending on public relations, parties for Berlin's great and good, and funding of amusements parks and Russian-language lessons in schools -- appears to be influencing German public opinion.

Sponsoring the Schalke soccer club in North Rhine-Westphalia has been especially popular. "They're very successful in creating an image of being a nice sponsor, of being like other companies," Poerzgen said.

Putin caused more controversy this month when news broke that the Quadriga Prize, a private award decided by top politicians, journalists, and business leaders, would go to the Russian prime minister this year.

Energy expert Kirsten Westphal of the Institute for International Security and International Affairs, which advises the government, said she believes the PR effort also indirectly affects foreign policy. "E.ON Rurhgas and Wintershall are powerful lobbyists for the strong bilateral relationship with Gazprom," she said.

When E.ON and BASF opposed the EU's proposed liberalization measures that so exercised Putin in November, they employed the standard argument that its passage would hinder long-term investment.

A warning from Rahr, of the German Council of Foreign Relations, is starker: If the EU doesn't "compromise" on its "very utopian" plans, gas-producing countries will be forced to defend their interests by forming cartels. "That will lead to confrontation" and encourage Russia to sell its gas elsewhere, principally in Asia, "which would be not very good for us."

Rahr also praised Russia for opening its energy market to Western investment. "Before the global financial crisis, Russia's oil- and gas-drunken elites thought everything would play in their favor, that they don't need Western technology. Now they want to bring in Western companies in force."

But Westphal disagreed. Like many others in Moscow, she said there's little evidence of any significant change in Russia, which so far has allowed little more than symbolic investment in Gazprom and other companies the Kremlin considers strategically important.

Foreign Policy Lite

Observers of German politics say there's little concern about Moscow's influence in Berlin because few understand what's really going on in Russia. Journalist Poerzgen said most politicians, even those who help formulate foreign policy, are engaged with it only superficially: "Despite Germany's new responsibilities since reunification, its view of the world is becoming increasingly provincial."

Moscow's hulking consulate -- built in the 1950s with an unmistakable Stalinist stamp in a tony part of former East Berlin -- boosts the very visible presence of Russian speakers in Germany. The 3 million of them, who comprise the second-largest group after the Turks, help influence attitudes toward Russia. Their number includes many ethnic Germans who left the Soviet Union after the communist collapse and wealthier recent migrants who have given the upscale neighborhood of Charlottenberg in downtown former West Berlin the new moniker "Charlottengrad."

Rolf Fuecks, director of the Heinrich Boll Foundation, a think tank connected to the Green Party, told me many Germans still feel guilt toward Russia for their country's role in World War II. "There's a sense we should avoid conflict at any cost," he said of the feelings, said especially to affect Schroeder, whose father died in the war.

His views and those of other older SPD members hold sway inside the party partly because many young prospective members have joined the Green Party instead, depriving the SPD of a "normal change of generations," Poerzgen said.

But she added that all parties are affected by a traditional sensitivity about being seen as "fighting too hard" for Germany's interests abroad. That's something the Russians have been able to exploit. "Whatever your opinion of Putin," she said, "he's clever in thinking in global terms, especially concerning long-term economic and political strategies. That's something politicians just don't do in Germany."

Putin has been especially adept at employing a legacy of the Cold War: a network of former East German officials still doing Moscow's work in Germany. The number of ex-Stasi agents among its ranks, including Gazprom Germania's director of personnel and its director of finance, who was investigated in 2008 for allegedly lying about his past, is particularly disturbing to critics.

Director of the Nord Stream consortium Matthias Warnig

But the best example of the Kremlin's use of communist-era intelligence agents for building modern-day Russia's state-controlled energy industry is Matthias Warnig. The director of the Nord Stream consortium is a decorated former Stasi officer who "The Wall Street Journal" reported as having helped Putin recruit spies in the 1980s, when the future president was a young KGB operative in the then-East German city of Dresden.

Warnig has denied working for the Stasi, and although he's said to have been close to Putin since their Dresden days, the Kremlin maintains they first met in the 1990s, when Warnig moved to St. Petersburg -- where Putin was a top city administration official -- to open an office for Dresdner Bank.

Dresdner played a role in the state takeover of Mikhail Khodorkovsky's Yukos oil company in 2004, when the bank's investment-banking arm valuated Yukos assets for the government. Later sold to an unknown shell company in a rigged auction, those assets were eventually acquired -- with the help of a loan from the same Dresdner Bank -- by state-controlled Rosneft, which became Russia's biggest oil company.

Most Germans don't suspect the old Stasi connections still exist, journalist Roth said. But "Gazprom couldn't have been as successful without them."

EU Role

Although the Economy Ministry is supposedly primary in formulating energy policy, economist Claudia Kemfert of the German Institute for Economic Research said there was "no energy policy" under Schroeder. "Instead there was a government that protected the energy companies and didn't regulate the market," she said. "But that's changing." So are attitudes to the EU.

Parliamentary elections in 2009 ended the grand coalition of the Christian Democratic Union (CDU) and the SPD in favor of a new junior partner, the free-market Free Democratic Party (FDP). Their agreement dropped any mention of a "strategic partnership" with Russia, a change FDP member Michael Link says represented a "sober, pragmatic approach."

Link occupies the middle ground in the German debate on Russia. "It doesn't mean we don't want a strategic relationship," he said. But "it's a goal, not reality." A polyglot former interpreter who's one of the Bundestag's top Russia experts, Link said he believes energy policy shouldn't be made solely on a national level.

EU Energy Commissioner Guenther Oettinger

The arrival of a new German energy commissioner in Brussels last year, a top CDU member named Guenther Oettinger who is former head of Baden-Wurttemberg, has boosted his hope for a bigger EU role.

Link praises Germany's domestically embattled foreign minister -- FDP leader Guido Westerwelle, who lost the party leadership since we spoke -- for seeking consensus among smaller EU members Schroeder's government all but ignored.

That development reflects dramatic improvement in ties with the Czech Republic, Poland, and other former Soviet bloc countries that have traditionally been among Russia's most vocal critics, partly because trade between Germany and those countries is booming, dwarfing business with Russia.

Germany sells more to the Czech Republic alone than to Russia, while imports from the Czech Republic, Poland, Slovakia, and Hungary amount to 40 billion euros ($56 billion) a year, compared to only 15 billion euros from Russia, including its energy.

Ties between Germany's Central European neighbors and Russia are also slowly improving, helping shift the postcommunist dynamic of relations in Central Europe. Even attitudes toward the Nord Stream pipeline, once a lightning rod in the split between "Old" and "New" Europe, have changed.

Pipeline Wars

Scheduled to be completed at the end of next year, the Gazprom-controlled Nord Stream pipeline will cost an estimated 7.4 billion euros ($10.3 billion). Advocates say the 49 percent stake in German, Dutch, and French hands will ensure the security of supplies to Europe. "It's a European, not a German project" that won't lock Germany into greater dependence on Russia, said Lindner of the Committee on Eastern European Economic Relations. Others argue Nord Stream's structure reflects the Kremlin's energy plan, not a unified European one.

The Green Party's Fell said that far from ensuring European supplies, Nord Stream will enable Moscow to stop deliveries to Poland and other countries at will and "sell gas to those who pay more. We've seen it already [in 2009], when people in Romania and Bulgaria were freezing when it was minus 30 degrees. That's terrible for the people."

But Germany's importance to Russia as a beachhead for its strategy across the continent lies in more than just Nord Stream. One of countless Gazprom-controlled or connected companies selling energy and channeling money through opaque schemes, Gazprom Germania holds shares in at least 25 more subsidiaries and joint ventures in England, Italy, Turkey, Hungary, and elsewhere.

One recent deal was particularly telling. In 2008, the company joined Centrex -- the obscure Austrian-based Gazprom subsidiary -- to buy a 20 percent stake in a gas-storage site in the Viennese district of Baumgarten. Not just any such facility, Baumgarten had been selected to serve as the end hub for a rival project.

The $11 billion Nabucco pipeline, launched in 2002 by energy companies from Austria and other countries, plans to transport gas from fields in the Caspian Sea region and Central Asia along a route that avoids Russia. Supported and partly financed by the EU, Nabucco is seen as an important symbol of cooperation that would push back against Moscow's efforts to split EU unity.

But it languished until Russia's gas cutoff to Ukraine, which deprived millions of heat during a bitter cold spell because 80 percent of Russian supplies to the continent cross Ukraine's Soviet-era pipeline network.

Nowhere is that better understood than in Moscow. Although the pipeline wouldn't come close to meeting Europe's growing demand for gas, the Kremlin is taking Nabucco as a serious challenge.

Russian Prime Minister Vladimir Putin is present at the signing of a memorandum of understanding on the South Stream project. Head of Gazprom Aleksei Miller (right) signed for the Russian side while the head of the BASF concern, Juergen Hambrecht, signed for the German side.

Gazprom, which already owned 30 percent of the Baumgarten facility, bought the additional 20 percent as part of a project for building a hugely expensive second major pipeline to Europe along roughly Nabucco's route, a project even Gazprom supporters call "political."

"The Russians want to show their muscle by stopping Nabucco," said Alexander Rahr, who doubts the $15 billion Russian project, called South Stream, will be completed.

Nevertheless, Moscow is busy buying up gas in Central Asia and the Caspian in a bid to starve Nabucco, while publicly ridiculing the rival project. "It's useless and dangerous," Putin said last year, "to build a pipeline without having supply contracts."

Meanwhile, Putin has headed a remarkable diplomatic offensive that has delivered a succession of deals with energy companies in eight European countries, including some participating in Nabucco. BASF has also joined, and the Kremlin has invited E.ON. But even as the pipeline wars heat up, experts are increasingly questioning their rationale.

Changing Market

Now accepted as inevitable, Nord Stream no longer generates heated opposition from formerly fierce critics. Even Poland is now considering taking part. Andreas Schockenhoff, a CDU member of parliament who serves as a Russia envoy for the Foreign Ministry, told me the answer to fears the pipeline would strengthen Kremlin control is to build an integrated European gas market. "We have to be able to provide supplies to other countries if there's a political or technical problem with Russia," he said.

But new developments in the global gas market have put the project under question. When Nord Stream was inaugurated five years ago, experts were predicting future gas shortages, but the current situation is "completely different," economist Kemfert said.

New discoveries of gas in the United States, Middle East and elsewhere that are increasing global supplies and the advance of LNG -- liquefied natural gas that can be shipped anywhere by tanker -- are driving a burgeoning spot market for short-term gas deals.

Together with the reduction in energy demand caused by the global financial crisis, those developments are driving down prices and transforming the global gas market. Although prices rose earlier this year as a result of the earthquake and tsunami in Japan, many economists believe the disaster will actually push prices down because of its negative impact on industrial production.

Westphal speaks of a "power shift." "Before the global financial crisis, the Kremlin set the rules," she said. "Now gas markets are under pressure. It's amazing." Kemfert agrees, saying the Nord Stream pipeline is "unnecessary," partly because Russia isn't investing enough in gas production to ensure it will be adequately supplied.

E.ON Rurhgas and other German companies are said to be questioning their decisions to sign long-term contracts for Russian gas, which is pegged to the rising price of oil. "I'm not sure how aware Russia is about this," Westphal said. Since bilateral contracts are negotiated in secret, it's hard to know how much the changing market is affecting relations, but many point to E.ON Ruhrgas's decision to sell its 3.5 percent stake in Gazprom in November 2010.

Dismissing such concerns, Nord Stream spokesman Ulrich Lissek said that "long-contracted" pipelines "stand for safety and stability in gas delivery." Others say despite recent developments, gas will inevitably grow more important as a "bridge" supply while wind, solar and other renewable energy sources slowly replace traditional fossil fuels. "Fifty percent of our supplies coming from renewables in 20 years is a nice dream," Rahr said, "but the next 20 years will be the era of gas."

For now, the Kremlin is forging ahead with its old strategy, based on future high gas prices. "I'm not sure it will pay off," Westphal said. But whether changes on the gas market will undermine Russia's race to lock in European demand, she added, depends on "how quickly Europe diversifies and builds up an internal, functioning gas market."

Too Special A Relationship

With the changing gas market offering Germans their best opportunity to tack toward a strong, unified EU position, the debate about relations with Russia is growing increasingly serious. But whether it leads Berlin to pursue energy security by looking beyond its immediate national energy interests -- enriching the energy industry through a "privileged" relationship with Russia -- before it's too late to decide otherwise remains to be seen.

How the struggle over energy plays out will affect other serious matters, including the advocacy of democracy in former Soviet republics, which Russia sees as part of its sphere of influence. The movement of Ukraine and Belarus back into Russia's orbit, at least for now, has caused the EU's Eastern Partnership plan for a future free-trade zone and visa-free travel regime for the EU and six countries on Russia's periphery to be put on hold, perhaps indefinitely.

"We're a really important voice, even if we Germans don't like to hear it, for Russia probably the most important in Europe," the Green Party's Beck said. "Our voice on such issues is critical for Europe's future, but it's missing now. It's just too much of a special friendship."

Comments

by: Jack from: US

July 11, 2011 18:26

US government has a good reason to oppose growing Russian influence in Europe. That is because US influence is waning, as US policies become more irrational and insane and self-destructive. With all the recent wars US started and could not win and looming collapse of the dollar, US fears Russia will overtake US in Europe. And US politicians know it all too well how it works, with Gazprom buying up european politicians, just like Saudis bought up all US politicians. Who would believe a country like Saudi Arabia who sent terrorists to kill more than 3000 Americans on 9/11 will get away with that, and even more, will escape any serious criticism. Every US politician, from John MaCain to Leon Panetta are in the pocket of Saudis. And that is all that matters. Saudi Arabia will continue to sponsor Al Qaueda under protection of US government.

In Response

by: Ingush

July 11, 2011 23:14

I know. Who would trust those Saudis? We all know that buildings which were specifically made by the Japanese architect Minoru Yamasaki to withstand two direct hits by Boeing 707 (after the 1945 B-25 incident see below) always fall. Building 7 of the WTC which was not hit also fell. However, others, like the Empire State Building which was NOT designed to be rammed by B-25 bomber in 1945 stood still till modern days. The First Interstate Bank fire, The Windsor Building Fire, The Beijing Mandarin Oriental Hotel Fire didn't demolish the buildings either. http://history1900s.about.com/od/1940s/a/empirecrash.htm"You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time. "-Abe Lincoln.

In Response

by: Ray F. from: Lawrence, KS

July 12, 2011 14:45

Nice comment, but the situation is not all that dire. Don't want to defend the current batch of US politicians, but our system has self-correcting (though often painful) mechanisms to get the country back on course. Just a little over a decade ago we were worrying about huge budget surpluses.

Second, Kremlin, Inc. does not capture the current political system in Russia. There are a lot of contradictory processes going on, some good, some bad. Russian business and political leaders aren't stupid, and they may learn that European democratic principles are in the long-term interests of their country. Same thing is true with the Saudi government.

There will always be those few who promise to remake the world using revolutionary or fundamentalist methods. Their message, though, can't compete against genuine improvements in society. Once we overcome our addiction to fossil fuels, Russia, Saudi Arabia and other petro-states will have to learn how to truly develop human potential.

p.s. I thought it was a great article. Thanks.

by: Gregory Allen Leeds from: Lewes, Delaware, USA

July 11, 2011 19:26

PETROCARIBE was an attempt by Venezuala/Russia to have central and south american countries nationalize their energy resouces and then get oil for 40% of it's actual market value from Venezuala, then pay the rest back(60%) over twenty five years at 1% interest. This was to insure the countries becoming beholden to Chavez/Putin for the next generation without a shot fired. This brazen attempt to circumvent OPEC and disrupt the worlds energy supplies shows for the last time the depths of depravity these Marxist dictators are willing to sink. Europe should heed the warning and expel notion of these peoples sanity or humanity.

by: Ingush

July 11, 2011 22:44

During the Cold War the Kingdom of Saudi Arabia lowered the oil prices on the United State's request to counter the Russian oil domination on the world's market and eventually to make them bankrupt. At the same time the KSA provided 50% of the cash to fight the Russians out of Afghanistan, that is 1:1 match for every dollar the US put into the war. Nowadays the KSA has no desire to do anything because all the fame goes to the USA anyway. On top of that the people in the KSA and Yemen are ready to kick the Saudi family and their US backup forces out of the country; rename the country into Arabia. Arab spring is going to become the Cold War winter. Mark my words.

by: Smurow from: Berlin

July 12, 2011 09:54

The facts you give on Gazprom Germania are partly dated. As of June 1 Kotenev was sacked as head of Gazprom Germania, a successor has not yet been appointed. Among others, this is due to purported restructuring plans to move the headquarters to Luxemburg and its operational activities to London. It is not quite clear what this will mean for German-Russian energy relations. Apart from that Feifer spoke to the major actors in German-Russian relations and thus gives an unprecedented wealth of opinion in one massive piece! Schroeder's decline to be interviewed once more discredits the opaque style of policy making in German-Russian relations he stands for. Unfortunately the Quadriga award for Putin is a somewhat awkward result of this policy.

In Response

by: RFE/RL editor

July 12, 2011 11:06

Thanks for pointing that out, we've amended the article to take that into account.

by: Boris from: London

July 12, 2011 13:25

Its long been time for US to return to Europe and clean up the mess.

by: Bill Webb from: Phoenix AZ

July 14, 2011 20:24

Merkel and Putin both speak German and Russian. They also both speak Energy and Trade. All the skullduggery aside, The economic development Germany and Russia are creating in the area is a testament to capitalism and democracy which the entire world should seek to emulate.

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July 15, 2011 06:58

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by: newrussian from: london

August 07, 2011 18:10

One must be full and naive believing in Reforming KREMLIN or Russians Impossible task !!!!!!!!!!!!!!!!!!!!!!!!!!!!